How to Manage a Mortgage

Miranda Marquit

Borrowing as much money as possible to buy a home may be the American dream of the past, but purchasing real estate is still a big life goal for many people (not to mention a good investment).

Originally published: January 25, 2013

Recent years have brought about lower interest rates, and more opportunities for homeowners to better manage their mortgages. However, managing your mortgage requires more than just blindly rushing forward to refinance. You need to pay careful attention to your situation, and what you think might happen next with your life and your finances.

Watch Out for the Adjustable Rate

Right now, it might make sense to get an adjustable rate mortgage when you buy a home, or even to refinance to an adjustable rate. Often, adjustable rate loans have lower rates than fixed rate loans. This makes them attractive to many homebuyers, as does the thought that the rate might fall a little bit lower.

At some point, though, rates will start rising again — especially if national debt issues prompt higher yields for Treasury securities. Don’t become too complacent. Have a plan for refinancing to a fixed rate if you know that you will be in your home for awhile. That way, you won’t get caught with higher payments when mortgage rates start to head higher.

Refinance Right

One way to manage your mortgage and bring down costs is to refinance to a lower interest rate. However, it’s important to pay attention to the way you refinance. If you don’t refinance right, you could end up paying more.

Will you recover the loan costs? Refinancing usually comes with its own costs. From loan origination fees to appraisal costs, there might be expenses. If you can’t get a no-cost refinance, consider how long you will be in your home. Will you be there long enough for the interest savings to offset the cost of the loan?

What are you doing with the term? Another consideration is the term of the loan. If you only have 15 years left on your mortgage, don’t refinance back out to 30. The best way to reduce your costs is to only refinance what you have left on your mortgage — or even shorten the term. A shorter term with a lower interest is almost always a win.

Should You Pre-pay on Your Mortgage?

If you are bent on getting rid of your mortgage debt as quickly as possible, it might make sense to pre-pay it ahead of schedule. Paying down a mortgage at 3.76% is a better investment than a savings account yielding 1% for example. You can make extra payments to the principal each month, and reduce what you owe significantly. Just make sure there is no pre-payment penalty attached to your mortgage.

On the other hand, you might be able to get better long-term results in the stock market. Instead of pre-paying your mortgage, it might make sense to take the extra money you have and invest it in low-cost investments like index funds and ETFs, or even to invest in dividend stocks. However, you need to realize that there is a chance of loss with this route, whereas you have a risk-free return when you pay down your mortgage (in the form of interest savings).

Look at your unique situation, your mortgage, and run the numbers. With the right management, you can reduce costs and get the most for your money.

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Miranda is a Betterment Staff Writer, freelance writer and professional blogger specializing in finance and investing topics. Her work has appeared in US News & World Report, Yahoo! Finance, and Huffington Post, and her work has been mentioned in numerous media.

Hi SiSo. The reference in the post to paying down your mortgage as being “risk-free” is comparing the interest you would save (a certainty) compared with the uncertainty of stock market returns. You have touched on a larger issue here – the question of whether it is a good investment to own your own home or not. You are right to say that there is risk associated with owning a home, but that is not what we were referring to in the post. Thanks for raising the question, we have clarified that in the article above as a result. Johanna

No matter what the value of your house does, the principal amount on your mortgage does not change. So unless you plan to go through foreclosure, bankruptcy, or a short sale, you will end up paying the mortgage back in full. If you take it as a given that you will be paying back your mortgage, then principal payments are risk free. If you lose money because of house price declines, you lose the same amount regardless of your principal payments.

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